Delta Airlines 2012 Annual Report Download - page 66

The SkyMiles Program includes two types of transactions that are considered revenue arrangements with multiple deliverables. As discussed
below, these are (1) passenger ticket sales earning mileage credits and (2) the sale of mileage credits to participating companies with which we have
marketing agreements. Mileage credits are a separate unit of accounting as they can be redeemed by customers in future periods for air travel on
Delta and participating airlines, membership in our Sky Club and other program awards.
Passenger Ticket Sales Earning Mileage Credits. Passenger ticket sales earning mileage credits under our SkyMiles Program provide customers
with two deliverables: (1) mileage credits earned and (2) air transportation. Effective January 1, 2011, we began applying the provisions of new
accounting rules to passenger tickets earning mileage credits. Under the new accounting rules, we value each deliverable on a standalone basis. Our
estimate of the selling price of a mileage credit is based on an analysis of our sales of mileage credits to other airlines and customers and is re-
evaluated at least annually. We use established ticket prices to determine the estimated selling price of air transportation. We allocate the total
amount collected from passenger ticket sales between the deliverables based on their relative selling prices.
We defer revenue for the mileage credits related to passenger ticket sales and recognize it as passenger revenue when miles are redeemed and
services are provided. We record the air transportation portion of the passenger ticket sales in air traffic liability and recognize these amounts in
passenger revenue when we provide transportation or when the ticket expires unused. The adoption of the new accounting rules did not have a
material impact on the timing of revenue recognition or its classification with regard to passenger tickets earning mileage credits.
Prior to the adoption of the new accounting rules, we used the residual method for revenue recognition. Under the residual method, we determined
the fair value of the mileage credit component based on prices at which we sold mileage credits to other airlines and then considered the remainder of
the amount collected to be the air transportation deliverable.
Sale of Mileage Credits.
Customers may earn mileage credits through participating companies such as credit card companies, hotels and car rental
agencies with which we have marketing agreements to sell mileage credits. Our contracts to sell mileage credits under these marketing agreements
have two deliverables: (1) the mileage credits redeemable for future travel and (2) the marketing component.
The new accounting rules do not apply to contracts to sell mileage credits entered into prior to January 1, 2011 unless those contracts are
materially modified. As of December 31, 2012, we had not materially modified any of our significant agreements. Our most significant contract to
sell mileage credits relates to our co-brand credit card relationship with American Express. For additional information about this relationship, see
Note 7
. For contracts entered into prior to January 1, 2011 that have not been materially modified since January 1, 2011, we continue to use the
residual method for revenue recognition and value only the mileage credits. Under the residual method, the portion of the revenue from the mileage
component is deferred and recognized as passenger revenue when miles are redeemed and services are provided. The portion of the revenue received
in excess of the fair value of mileage credits sold, the marketing component, is recognized in income as other revenue when the related marketing
services are provided. The fair value of a mileage credit is determined based on prices at which we sell mileage credits to other airlines and is re-
evaluated at least annually.
If we enter into new contracts or materially modify existing contracts to sell mileage credits related to our SkyMiles Program, we will value the
standalone selling price of the marketing component and allocate the revenue from the contract based on the relative selling price of the mileage
credits and the marketing component. A material modification of an existing significant contract could impact our deferral rate or cause an
adjustment to our deferred revenue balance, which could materially impact our future financial results.
Breakage. For mileage credits which we estimate are not likely to be redeemed (“breakage”), we recognize the associated value proportionally
during the period in which the remaining mileage credits are expected to be redeemed. Management uses statistical models to estimate breakage
based on historical redemption patterns. A change in assumptions as to the period over which mileage credits are expected to be redeemed, the actual
redemption activity for mileage credits or the estimated fair value of mileage credits expected to be redeemed could have a material impact on our
revenue in the year in which the change occurs and in future years.
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